Sunday, March 27, 2011

US markets rose on Friday following Oracle's results, and 4th quarter GDP that was revised upwards. The S&P 500 gained 4.14 points or 0.32% to 1,313.80. The Dow rose 50.03 points or 0.41% to 12,220.59.

Oracle forecast an increase in software sales for the current quarter, raising hopes of an increase in business spending. Meanwhile, US 4th quarter GDP was revised up from 2.8% to 3.1%. For the week, the S&P 500 gained 2.7%, while the Dow climbed 3.1%.

Euro zone troubles continue

The Prime Minister of Portugal resigned on Friday after failing to pass his austerity package in Parliament. Consequently, the yield on Portugal's 10-year government bonds rose to 7.79%, a record high. Making matters worse is the fact that Portugal will not be able to accept a bailout until after the election.

In addition, Moody's downgraded its ratings on about 30 Spanish banks this week, leaving only the ratings on the largest few intact.

Middle East fighting continues

Western fighter planes continued to bomb Gadaffi's forces in Libya. Meanwhile, unrest continued in Bahrain and Yemen. In Jordan, reformers and pro-government factions clashed on Saturday, resulting in 1 person dead and 330 wounded.

Looking ahead to next week

Investors will be paying attention to economic data next week, as the US government announces March employment data. Since next week is the last week of the quarter, fund managers will be doing the usual window-dressing.

Markets have been extremely resilient to bad news this week, especially following the resignation of the Portuguese Prime Minister, and the Portuguese 10-year bond reaching a yield of 7.79%. However, the markets' resiliency cannot be expected to continue indefinitely. The continued clashes in the Middle East will be another negative factor for markets. Unrest spreading to Jordan, Saudia Arabia's neighbour, is likely to cause investors to worry.

In addition, in Japan, one of the reactors appeared to be close to melting down on Saturday, after high amounts of a radioactive element were found in seawater near the reactor. Thus, investors can expect markets to head lower next week on the troubles in the euro zone, the Middle East and possibly Japan.

Thursday, March 24, 2011

Research in Motion announced 4Q earnings today that beat market expectations, but lower 1Q guidance sent the shares down 10% in after-hours trading. EPS (earnings per share) was $1.78, $0.02 above consensus of $1.76 and 40.16% above last year's $1.27. Revenue in the quarter was $5.6 billion, a 36% increase over last year.

Management also gave EPS guidance for FY 2012 that was significantly above expectations, guiding to $7.50 versus consensus of $6.80. However, investors focused on the lower 1Q EPS forecast of $1.47 to $1.55 versus consensus of $1.65, and drove the shares lower.

While the lower 1Q guidance was disappointing, it was well explained. On the conference call, it was stated that the lower 1Q EPS is caused by higher capital expenditures due to the PlayBook, and several BlackBerry devices that are near the end of their life cycle.

RIMM is spending more money in order to develop 3 4G versions of the PlayBook (LTE, HSPA+ and Wi-MAX). In addition, a lot of capital expenditure is needed for software, hardware and developer aspects as RIMM launches the PlayBook, the first tablet for the company and one that runs on a new OS. For example, the free PlayBook offer for developers who submit a PlayBook app is likely part of the reason for the lower 1Q EPS. In addition, some corporations will be receiving trial units of the tablet.

The lower 1Q EPS was also caused by several devices that are nearing the end of their life cycle. RIMM did not launch a new device in the quarter, and devices such as the Bold have been in the market for many months. This results in lower sales volume.

2. Transitioning to QNX is an opportunity

The increased expenditure will result in RIMM launching the most powerful tablet on the market, and future BlackBerry smartphones running the QNX OS. Since RIMM is one of the oldest smartphone makers, a transition period is inevitable as the company moves away from the legacy BlackBerry OS to the QNX OS, whose multi-tasking and performance capabilities make it the most powerful smartphone and tablet OS on the market.

RIMM also announced today that it will be providing 2 app players, so that Android 2.3 and BlackBerry Java apps can be run on the PlayBook. This instantly overcomes a perceived weakness of few apps, since the PlayBook will have the several thousand PlayBook apps already submitted, 25,000 apps in App World and 200,000 Android apps.

3. A very strong FY 2012

RIMM today gave guidance for FY 2012 EPS of $7.50, which is $0.66 above the consensus of $6.84. With the shares having closed today at $64.09 (before the after-hours sell-off) the shares are trading at a forward P/E of 8.55, far lower than Apple's P/E of 12.

Other than the many touch-screen devices that will be launched this year, the PlayBook should be a big part of this year's profits. With the most powerful multi-tasking and performance capabilities among tablets, a thriving QNX developer community and now over 225,000 apps available, sales of the PlayBook will likely exceed expectations. In addition, there is significant pent-up demand from corporations, and a portion of the installed base of 60 million BlackBerry users will be buying a PlayBook.

Thus, with Gartner expecting tablet sales of 54.8 million this year, most analysts' expectations of 2 to 3 million PlayBooks sold are too conservative. In fact, it would be more reasonable to expect the PlayBook taking 10 to 15% of market share, which would put sales at 5.48 to 8.22 million units.

Sunday, March 20, 2011

US markets rose on Friday, after a ceasefire was announced by the Libyan government, and the G7 pushed the yen down 3%. The S&P 500 rose 5.49 points or 0.43% to 1,279.21, while the Dow added 83.93 points or 0.71% to 11,858.52. The US government also allowed banks to raise their dividends, which sent banks' shares higher on Friday.

For the week, the S&P 500 was down 1.9%, while the Dow dropped 1.5%. This was due to markets responding to the earthquake, tsunami and nuclear meltdown in Japan. Since the earthquake struck Japan shortly before markets closed on Friday, North American markets were hammered by the country's developments from Monday to Wednesday. On Tuesday, the Dow fell as much as 300 points at one point.

US housing disappoints

On Wednesday, it was announced that US housing starts dropped in February by 22.5%, to an annual rate of 479,000. It was the biggest decline since March 1984. Meanwhile, building permits fell 8.2% to an annual rate of 517,000, the worst performance in about 40 years. It was another blow to the US housing sector, which is still trying to find a bottom after the financial crisis.

Looking ahead to next week

The nuclear crisis in Japan is showing signs of stabilizing, with engineers attaching power cables to the generators. However, the situation is not resolved, with a possible outcome being sealing the reactor within concrete and sand.

The bombing of Gaddafi's forces by several nations will likely add uncertainty to markets. Meanwhile, fighting continues in Bahrain, with neighbouring countries such as Saudi Arabia having sent police officers and soldiers to help Bahrain crush the protesters. The euro zone is another worry, with Portugal having been downgraded this week.

Last Sunday, I wrote that “Thus, with the many negative factors coming up next week and the weeks ahead, I expect a correction of 10 to 15% within the next month.” North American markets ended up almost having that correction in one week, with a correction of about 8% this week. However, with so many negative factors still in play, investors should expect markets to continue heading lower next week.

Sunday, March 13, 2011

The earthquake in Japan pulled North American markets lower for most of Friday, but the indices managed to rise for the day. The S&P 500 rose 9.17 points or 0.71% to 1,304.28, while the Dow gained 59.79 points or 0.50% to 12,044. For the week, the S&P 500 fell 1.3%, while the Dow lost 1%. This was due to a plethora of bad news from the euro zone, and weak US economic data.

Euro zone crisis in spotlight again

On Wednesday, Portugal auctioned €1-billion of 2-year bonds, but the yield was at a record high of 5.993%. In addition, the yield on 10-year Portuguese government bonds reached 7.6%, an unsustainable level that is close to the record high reached last month.This caused investors to take a hard look at Portugal, which most people believe will have to receive a bailout. On Thursday, Moody's downgraded Spain's credit rating from Aa1 to Aa2, and warned that further downgrades are possible.

On Saturday, it was reported that the EU has agreed to cut the yield on Greece's bailout loans by 1%, from 5% to 4%. In addition, the repayment period was increased from 3 years to 7.5 years. While this will certainly be positive for markets, Greece is the only beneficiary, with the situations in Portugal and Ireland unchanged.Weak US economic data On Thursday, it was reported that US initial jobless claims rose 26,000 last week to 397,000. In addition, the US trade deficit increased in January to $46.3 billion, which was more than expected. China also posted a trade deficit, which surprised many and raised concerns about the strength of global economic growth.Oil and gold stabilize

Intense fighting in Libya and concerns about protests in Saudi Arabia caused gold to hit a record high of US$1,445.70/ounce on Monday. However, the “Day of Rage” in Saudi Arabia was uneventful, causing Brent crude to fall $1.59 on Friday to $113.84. WTI crude fell $1.54 to settle at $101.16. Meanwhile, gold futures rose 0.7% on Friday to close at $1,421.8/ounce, down 0.5% for the week. Meanwhile, silver rose 1.7% for the week to settle at $35.935/ounce. Expect a correction aheadWith the combination of an euro zone credit crisis gathering steam, and unrest in Libya and the Middle East causing Brent crude to hold above $110, investors can expect markets to head lower in the coming week. In addition, the earthquake in Japan will weaken investors' view of the global economic recovery. The S&P 500 also traded below its 50-day moving average for much of the week, which is a bearish indicator.With US employment having been strong in February, some economists expect weaker jobs growth ahead. This would push the unemployment rate above the current 8.9%. In addition, the end of QE2 is less than 3 months away. With QE2 having been a main reason for the market's rise since late August, the end of QE2 will have a very negative impact for markets. With markets usually pricing in events months in advance, investors could be taking money off the table now in anticipation of the end of QE2.Thus, with the many negative factors coming up next week and the weeks ahead, I expect a correction of 10 to 15% within the next month.

Thursday, March 10, 2011

North American markets were hammered today by a variety of bad news. The S&P 500 dropped 24.91 points or 1.9% to 1,295.11, while the Dow fell 228.48 points or 1.9% to 11,984.61. The S&P 500 fell by the largest amount in 2 weeks. In Canada, the TSX fell 1.8% to 13,638.58.

Euro zone troubles mounting

There was no shortage of bad news today. Moody's cut its rating on Spain by 1 notch, stating that it believes the cost to recapitalize the country's banks will exceed the government's estimate of €20-billion. Yesterday, 2-year bonds auctioned by the Portuguese government yielded 5.993%, which was a record high. In addition, the yield on 10-year Portuguese government bonds stood at 7.6%, close to the record high.

Weak US data

Today, it was also reported that US initial jobless claims rose 26,000 last week to 397,000. In addition, the US trade deficit increased in January to $46.3 billion, which was more than expected. China also posted a trade deficit today, which surprised many.

Middle East turmoil continues

Fighting also intensified in Libya today, as government and rebel forces continued to battle. There was also concern about Saudi Arabia, as reports emerged of protests in the country.

A correction is likely

With the S&P 500 having rallied about 25% from its September level, markets are clearly out of steam. In fact, North American markets had been trading sideways in recent weeks, and have started heading lower this week. The combination of high oil prices due to unrest in the Middle East and a resurgence of an euro debt crisis is clearly proving enough to push markets lower. In fact, investors can expect to see an official correction ahead. I have previously written on this blog that I expect a correction of 10-15% in the first quarter. We could very well be at the beginning of that.

Sunday, March 6, 2011

US markets were down on Friday, as fighting intensified in Libya and WTI crude surged above US$100/barrel once again. The S&P 500 lost 9.82 points or 0.74% to 1,321.15, while the Dow was down 88.32 points or 0.72% to 12,169.88. On Friday, Brent crude surged above $116/barrel, while WTI crude rose above $104/barrel. For the week, the S&P 500 edged up 0.1%, while the Dow rose 0.3%.

Oil pulling markets down while jobs pushing markets up

As oil prices continue to rise, investors are becoming concerned that it would cut economic growth. However, the jobs report on Friday was a strong positive for markets.

The Labor Department reported a payroll increase of 192,000 in February, which was higher than the 185,000 that economists expected. In addition, the unemployment rate fell from 9% to 8.9%, which was lower than the 9.1% expected. The unemployment rate has continued to fall since the 9.8% in November.

However, some economists argue that if February job gains were averaged with January's gain of only 63,000 jobs, then the numbers would be far less impressive. In addition, there is the possibility that the unemployment rate could edge higher in the coming months, as people who had given up looking for a job enter the labour force.

Nevertheless, February's job gains and the unemployment rate were impressive. If high oil prices were not in the backdrop, markets would have headed much higher on Friday.

Looking ahead to next week

If oil prices continue to rise next week, then investors can expect to see markets heading lower. With WTI crude above $100 and Brent crude close to $120, the prices have risen 50% in the past year. They are in dangerous level that will start to impact economic growth. Gold can be expected to continue to do well if the oil price stays high, since investors will be looking to hedge inflation.